Charter schools tapping into private dollars

A half-dozen Arizona public-charter-school operators have found a way to dip into a state tax credit program intended to help parents pay tuition at private schools.

An Arizona Republic investigation found that since 2001, the financing method has provided the charter schools nearly $600,000, most of it in the past three years.

The credit, which gives taxpayers a dollar-for-dollar tax break for donating to private schools, was created to enable public-school students to switch to a private school. That would foster more competition among all schools and save the state money, proponents said.

But the unusual way that some charter schools are tapping the tax credit does not meet those goals.

The practice is an example of how the program has operated for a decade under a vaguely written, lightly enforced law that allows schools to use the donations in ways other than what lawmakers intended.

The Republic found that five of the charter schools, which are privately owned but state-funded, justified getting the tax-credit donations by spinning off the afternoon half of their full-day kindergarten into a private non-profit or just designated the afternoon half as a private service.

The schools used their state education funds to pay for morning kindergarten and other classes such as first through sixth grade, which are a part of their public school.

So a child attending full-day kindergarten spends the morning in public school and the afternoon in private school.

The five schools also received state funding for full-day kindergarten. That meant they were effectively double dipping.

The state, however, does allow both district and charter schools to opt to offer only a half day of kindergarten and use part of its funding for full-day kindergarten for other operations.

One other charter school uses the donations not for kindergarten but to fund after-school and summer programs, which are not specified in the tax-credit law as a qualified school.

Three of the schools set up a school-tuition organization, a type of non-profit that collects and distributes tax-credit donations for private-school tuition. The three tuition organizations directed nearly 60 percent to their own schools, state records show.

"Is it the intent of the law? No," attorney Clint Bolick of the Goldwater Institute, who helped establish Arizona's private-school tax-credit law, said of the half-day kindergarten spinoffs. "Is it permissible under the law? I think they could meet the criteria."

Several public-school officials contacted for the story said they had never heard of the innovative financing. Bolick said unless the law changes, a move he supports, any of Arizona's nearly 1,900 public schools could tap the tax-credit cash by incorporating part of their campus or operation as a private school.

Bolick is pushing the Legislature to rewrite the law to provide for better controls. Bolick wants lawmakers to close loopholes that compromise the law's original intent, including those that allow public charter schools to collect private tax-credit cash.

A Republic investigation into school-tuition organizations, published in August, also found that many parents swap private tax-credit donations: Two parents agree to earmark their gifts for each other's children, avoiding a ban against donating the money to your own child. Also, much of the tax-credit money aids affluent families, not the poor as originally intended.

State lawmakers have formed a task force to review the tax credit in the wake of reports of possible abuses.

"You learn from experience, and enterprising folks are certainly going to look for ways to find sources of revenue," Bolick said. "But the critical thing is, critical to the integrity of the program, is making changes when you discover problems."

Some school officials see a benefit in the broader application of the law.

Nicholas Sofka runs a 61-student K-6 charter school in Tucson, Highland Free School. He created a separate non-profit to run before-school care, after-school programs and summer school.

Sofka also created a school-tuition organization, Alternative Schools Scholarship Fund, which provides the money for the before-, after- and summer-school programs. From 2003 to 2008, Alternative Schools collected $78,241 in donations from parents, former students and school supporters, 80 percent of which went to his school for defraying parents' fees for the summer-school and other programs.

"You have to generate money to pay teachers, to pay for utilities, to pay for supplies," Sofka said in describing the challenges charter-school owners face.

"How can they stop me?" he asked. "We're doing everything lawful."

Publicly funded

Charter schools do not qualify for tuition-tax-credit funds for private schools because they are publicly funded schools. They receive an average $7,332 per student in state education funds.

Like district schools, charter schools also receive funding such as federal funds for special-needs and low-income students and special sales-tax money for public schools. The schools also can receive public-school tax-credit donations from parents - up to $400 a year per family - to help fund extracurricular activities. They also get technology and tutoring grants.

Despite the aid, charter-school owners say the extra tax-credit cash allows them to improve the quality of their programs and reduce the cost to parents. Some owners say operating their public schools and private programs side by side, and running their own school-tuition organizations, is legal and just good business.

Georganna Meyer, chief economist for the Arizona Department of Revenue, said the law does not prohibit charter schools from creating private kindergarten programs, even for half the day, to take advantage of private-school tax-credit donations.

The law does suggest a school must charge tuition in order for its students to receive tax-credit money from a tuition group. The reason is the law defines tuition organizations as non-profits that give scholarships or tuition grants to students.

"I struggle with this," Meyer said, "but when they tell me this is for kindergarten and they charge tuition, then I don't see any way I can say that doesn't work."

Tuition money

Most private schools charge tuition, and students wanting private tax-credit scholarships must submit applications to the school or a tuition organization.

But a few schools dispense the money in a way that suggests it is being used as direct funding for the program, not for individual scholarships.

Tammy Whiting runs a Mesa charter-school group that has two schools, each with a half day of privatized kindergarten. Whiting's schools don't charge tuition, so her Montessori Centre School Tuition Organization doesn't take applications for scholarships at the school. Instead, the money received is a direct revenue source that pays for operating the second half of the kindergarten day, Whiting said. Whiting's tuition organization keeps 10 percent of the donations, the legal maximum, to help pay for the school's office administrator.

Since 2000, her tuition organization has collected $330,029 from the schools' parents, and Whiting has used 68 percent, or $224,294, to pay for the charter schools' operation of the half-day kindergarten.

"If the ability to use this money in this capacity was questioned now, I would give this money to someone else to make sure they got educated," Whiting said.

Sofka, who runs Highland Free School, said money from his tuition organization reduces all students' tuition for his school's summer school and his before- and after-school programs. Parents pay $160 a month for the after- or before-school program instead of the actual cost of $260, he said. Sofka said his "liberal" application process for the tuition money allows all of his parents to get the discounted tuition.

The tax-credit law does not specify after- or before-school or summer school students as eligible for tax-credit money. A qualified school is a "nongovernmental primary school or secondary school" or "a preschool for handicapped students."

Putting a stop to it

At least three charter schools that have funded a half day of kindergarten with private tax-credit money say they have stopped or will stop.

One of the main reasons two of the schools cite is that the state began funding full-day kindergarten in 2006-07. The other school said it became too hard to keep the tax-credit money separate from other funds.

From 2000 to 2008, Valley-based Montessori Day Public Schools Chartered used private-school tax-credit money to help parents pay for the second half of kindergarten. The scholarship money came through Foundation for Montessori Scholarships, a school tuition organization. Richard Mayo, secretary and treasurer of the tuition organization, also is an administrator for Montessori Day Public Schools Chartered, which operates the kindergartens.

About 35 percent, or $129,990, of the money collected by the tuition organization went to help parents pay for afternoon kindergarten. Mayo said the foundation will no longer give tax-credit money to Montessori Day to help fund a full-day kindergarten program because of the increased state funding for full-day kindergarten. Instead, any available money will be sent to other private schools.

Hermosa Montessori Charter School in Tucson received $88,619 in tax-credit money for the second half of its kindergarten day but stopped when the state began paying for a full day, Superintendent Sheila Stolov said. Stolov said she doesn't understand how other charter schools can continue to be eligible for private tax-credit money.

"I don't see how it can legally be done," Stolov said. "If you are funded by the state, you cannot charge tuition. That's the way the law reads, in my interpretation."

THE TUITION TAX CREDIT

Many unknowns

Key areas that have allowed the tax-credit system to flourish with few controls:

Loose oversight. School-tuition organizations, or STOs, don't have to file audited financial statements. The Arizona Department of Revenue doesn't have resources to routinely monitor those who claim the credit or the private organizations holding the money. The non-profit STOs are unlikely to be audited; the IRS audits only about 1 percent of all non-profit tax returns annually.

Vagueness in law. The law requires 90 percent of an STO's revenue go to scholarships. Most donations come at the end of the year. So STOs routinely fail to meet the 90 percent rule in the same year. The law prohibits taxpayers from making donations for their own children but allows parents to strike deals to give to each other's children or enlist friends and family members to donate.

No penalties. The law doesn't provide any fines or punishment for STOs that fail to follow the law.

Lack of transparency. It is not clear who benefits from the scholarships. The law was billed as help for the poor, but it's unclear how often that is the case. There is no way to track performance of students or schools.